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    IndusInd Bank Q2 results:
    IL&FS crisis casts long shadows over bank’s potential earnings growth

    Publish Date: October 22, 2018

    Recommendation: Buy

    Target price: Rs 1,850

    IndusInd Bank didn’t have the best of quarters this time around, mainly due to the IL&FS shadow lurking overhead.

    Unfortunately, the lender did not publicly divulge its total exposure to IL&FS. But what we know so far is that the bank has kept aside Rs 275 crore as emergency provisions if the crisis hits the ceiling.

    The management feels the emergency provision amount could rise by a further 20-25% only in the worst-case scenario.

    We are talking about IL&FS (Industrial Leasing and Financial Services) — an infrastructure company — because it borrowed more money (roughly Rs 91,000 crore) from the market than it could pay back (it had only Rs 6,950 crore in its reserves). That’s a leverage ratio of 13 times!

    So, let’s see how the IL&FS crisis has affected the bank in the quarter ended September 30:

    Hit on net profit

    The bank reported a net profit of 5% from last year’s corresponding period — which is the lowest in more than a decade.

    The earnings growth was low mainly due to more than 100% growth in provisions. The total amount of provisions now stand at Rs 590.27 crore. Out of that, Rs 275 crore has been kept aside for the IL&FS crisis alone.

    Had it not been for the incremental jump in provisions, the bank would have reported 25% increase in net profit and stuck to its recent track record of delivering high profits.

    Asset quality worries

    Creases have appeared due to the bank’s exposure to IL&FS.

    But Romesh Sobti, CEO of the bank, downplayed the risks. He was quoted by Bloomberg-Quint as saying: “We may not even have to take that much of a hit because our exposure (to IL&FS) is against very specific cash flows.”

    What we know is that the lender has exposure to IL&FS’s holding company and a specific subsidiary, which has a relatively high investment rating. The bank also has the first right of access if/when the debt-hit group comes into some money.

    However, the bank has started lending to companies with better credit profile, a major reason why it has managed to keep its slippage ratio under control. (Slippage ratio indicates how good loans become bad. Lower the slippage ratio, better the asset quality of a bank)

    The bank’s overall slippage has steadily declined from 1.3% in the last quarter (April to June) to 1.1% now (July to September). Its gross non-performing loans (GNPL), also known as NPAs, have climbed down marginally from 1.15% last quarter to 1.09% now.

    Related read:  5 things to know about bank NPAs

    Growth in providing loans

    This is where IndusInd Bank has lived up to its billing. While retail loan grew at 32% (Year-over-Year), corporate advances grew even faster at 35% (YoY).

    A higher loan growth is good news for banks. Since banks levy interest rates on loans, they get an opportunity to increase their earnings eventually. Therefore, higher the loans, higher are the earnings for banks. It keeps people keeping a tab on bank stocks happy too.

    Deposits, meanwhile, grew at a slower pace — increasing by 19% (YoY). While the growth momentum in savings account deposits slowed down to 27% (YoY), its current account deposits grew by a modest 14% (QoQ). Therefore, slower deposit growth has forced the bank to borrow from external sources in the last few quarters.

    It must be noted that the bank’s CASA (current account, savings account) ratio — higher ratio helps bank get money at a lower cost — improved slightly to 44%.

    Other key takeaways

    — The bank’s net interest income — difference between the interest it earns from its loans and the interest it is supposed to pay to its depositors — rose 21% (YoY).

    — The lender’s margin shrunk slightly by 10 basis points this quarter.

    — Fee income grew at 22% due to strong banking fees, foreign exchange fees and trade fees.

    Disclaimer: REDUCE rating suggests we expect the stock to deliver -5 to +5% returns over the next 12 months.

    BUY rating suggests we expect the stock to grow around 15% in the next 12 months.

    ADD rating suggests we expect the stock to deliver more than 5% returns in the next 12 months.

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